The market is set to gap down for the second day in a row as it becomes clear that the U.S. will follow through with increased tariffs on China. President Trump warned on Sunday that this move was coming and U.S. Trade Representative Robert Lighthizer confirmed Monday night that the tariffs would be put in place at midnight on Thursday night.
Chinese Vice Premier Liu He is still scheduled to attend negotiations later this week but has shortened the length of his stay. There are a number of reports that China is not willing to provide any further concessions. U.S. negotiators are pessimistic about a quick resolution, which is why the tariffs will be put in place.
The big question for traders and investors is whether the market can shake off this issue for a second day in a row.
On Monday the indices traded straight up after a gap down open and the iShares Russell 2000 ETF (IWM) even managed a positive close. The trade issue tends to have a much greater impact on big multinationals such as Apple Inc. (AAPL) and Boeing Co. (BA) than it does on smaller-cap stocks and sectors such as biotechnology.
Quite often when there is a macro event such as the China trade issue it causes movement in the indices that drives the entire market. In such cases all stocks move in tandem and there is little appreciation that certain stocks are not really impacted by the news. We did see some focus on individual stock picking on Monday while the big-cap indices suffered more.
It will be particularly interesting here on Tuesday to see if the dip buyers show up at the open again. Technically the most important thing right now is that Monday's opening lows are not breached. For the S&P 500, that level is right around 2900. If that level holds, then we should be able to focus on some stock picking. If 2900 does not hold, then look for the indices and ETFs to drive stocks down in tandem.
The market indicated Monday that trade problems with China are not the disaster for which the bears have hoped. It does create a headwind, and with the indices technically extended and negative seasonality picking up it is going to make upside movement difficult. However, there are no signs yet that a downtrend is taking hold.
This is peak week for small-cap earnings, which should create some interesting pockets of action, but big-caps are likely to stay pinned down as the market grapples with the trade issue.
The best approach right now is to make sure you handle trades tightly and don't let losses build. The best indicator of market problems is your profit-and-loss report. If you are losing money then do some selling.
We have a weak start and I'm looking for dip buyers to try again, but I don't expect it to be as easy as Monday.